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South Sudan: A new republic built on oil

Oil was the elephant in the room on independence day. But it’s as crucial to South Sudan’s future as it was to its past

Article includes a review of oil strategy; oil infrastructure map; timeline to Independence; and a guide to who’s who

AS SOUTH Sudanese, still ecstatic from celebrating their independence from Sudan, stopped to talk while they cleaned away the detritus of the previous day’s celebrations around the John Garang Mausoleum in Juba, one small, but crucial word was absent from the conversation. Oil.

No-one uttered it, but evidence of oil, and the connections to it, were everywhere in Juba, ever-present and deliberately downplayed.

Malaysia’s Petronas had erected banners around the new capital, congratulating South Sudan on its hard-earned independence. PetroChina and China National Petroleum Corporation (CNPC) staff crowded the bars at the Beijing Juba and Eastern Pearl hotels. The national stadium, the venue for the South Sudanese football team’s debut against Kenya’s Tusker FC on 10 July (the home side lost 3-1, scoring two own goals), was refurbished and returfed as part of a project managed by White Nile (5B) Petroleum. The stadium revamp cost $1.8 million, paid for by India’s ONGC Videsh, Petronas and CNPC. Oil money helped pay for the country’s 60 km of paved roads.

Even Salva Kiir Mayardit, the fledgling nation’s first president and leader of rebel group the Sudan People’s Liberation Movement (SPLM) and its armed wing, Sudan People’s Liberation Army (SPLA), failed to mention oil as he delivered his inauguration speech to a sea of jubilant South Sudanese, world heads of state and the massed ranks of the SPLA, all sweltering in Juba’s dry, relentless heat on 9 July.

OIL WAS the elephant in the room on independence day. But it’s as crucial to South Sudan’s future as it was to its past. Without oil, the world’s newest nation would probably not exist. And without the money oil brings, South Sudan will struggle to achieve meaningful independence. The income derived from South Sudan’s estimated production of 375,000 barrels a day (b/d) will enable the nation to rebuild after 50 years of brutal civil conflict and deliberate under-development. But oil, as ever, can also be a curse. And the world’s youngest country has much to do to ensure its resource wealth does not, yet again, draw it into conflict.

In the meantime, its oil output is a hefty prize, worth around $40 million a day – a vast sum for a poor nation. Not all of the country’s crude commands top prices, because in addition to high-quality, easily tradeable Nile Blend – produced from blocks 1, 2 and 4, and in lesser volumes from Block 5a – South Sudan also produces waxy, acidic Dar Blend from blocks 3 and 7, which during 2009 traded at a sharp, 60% discount to Brent, said Benjamin Leo in a paper for the Centre for Global Development last year. This discount is smaller now, one analyst prices Dar Blend at a maximum of $100 a barrel, but either way, Juba’s coffers – while not as full as some believe – will hardly be empty.

In the short to medium term, oil income will help the country reduce, although not entirely sever, its reliance on aid as the hard work of nation-building begins. Oil money will help fund construction of a planned 2,000 km of new roads; equip and staff hospitals and clinics; and pay for schools. It could fund a power grid, bringing electricity to much of the country; and it can help the government provide its citizens with clean drinking water and sanitation.

BUT OIL was also one of the triggers of the second Sudanese civil war, which erupted in 1983. It helped fuel and prolong the conflict and it was crucial to the 2005 Comprehensive Peace Agreement (CPA), which ended the war. Oil has also been pivotal to Sudan’s political and economic life in the six years since the CPA. Oil, in short, is the very foundation of the Republic of South Sudan.

And, as the euphoria of 9 July ebbs, South Sudan faces a daunting number of obstacles, the thorniest of which hinge on oil. The country has yet to fully formulate its oil policy, although Norwegian advisors are helping it draft a petroleum law. Getting the legislation right will be critical. The law, which has yet to go to the South Sudan Legislative Assembly, must include mechanisms to ensure transparency, particularly with oil revenues. Industry insiders and observers have already voiced fears of entrenched corruption – which makes it difficult to woo explorers to the country’s upstream. Those already present need incentives to step up the pace of exploration and development. Indeed, industry insiders believe that without discoveries, South Sudan’s reserves will run dry within 25 years. And in a country that lacks much basic infrastructure outside its main population centres, roads, rail routes and pipelines must be built.

But the most urgent issue South Sudan faces is reaching an agreement with neighbouring Sudan over oil revenues and access to infrastructure. Most, but not all, of the producing fields Sudan relied on are now in South Sudan. But the government in Khartoum controls the two export pipelines, refineries and the Port Sudan export terminal, on the Red Sea.

ONE OF the central planks of the CPA provided for a 50:50 oil-revenue split between north and south. The deal ensured that, as Sudan moved towards peace, the country kept producing oil, earning vital cash.

Originally, the revenue agreement was to remain in place until January’s referendum on secession, with a new deal to be negotiated after the result of the vote. The referendum, judged free and fair by international observers, went ahead, and saw 99% of the south’s voters choose to break away from the north – but negotiations on the new deal have stalled. As an interim measure, the 50:50 agreement remained in place, but ended on 9 July.

The week before independence, talks in the Ethiopian capital Addis Ababa between representatives from Juba and their counterparts from Khartoum over a post-independence oil agreement broke down, yet again, without resolution. Both sides said talks would resume, with Kiir and Sudan’s President Omar al-Bashir signing a framework agreement for continuing negotiations after 9 July. At press time, a date for talks was yet to be set.

A source in South Sudan’s government told Petroleum Economist: “It is a stalemate. Khartoum wants to continue with the 50:50 revenue agreement. We cannot agree to that. We will agree only to a tariff arrangement, where we pay a fee for the transportation of oil through the pipelines that cross Sudanese territory, and perhaps taxes. The oil is ours. The money is ours.”

It is less clear whether Khartoum is willing to compromise – or indeed what the regime’s intentions are. But there are worrying precedents that point to a dark outcome. As one observer pointed out: “When Bashir has trouble close to home, he starts a war. That’s how he operates.”

Sadly, the proof of that analysis has been evident in recent months along South Sudan’s new borders. In Abyei, a region claimed by both north and south, and long considered a bridge between the two, violence has again erupted. Abyei is home to the nomadic Messiria, Arabic cattle herders who are loosely aligned to the north, and the agricultural-pastoralist Dinka Ngoks, loyal to the SPLM. As part of the CPA, residents are to vote in a referendum to decide whether the region – whose boundaries were redrawn by the Permanent Arbitration Commission (PAC) in The Hague in 2009 – will belong to Sudan or South Sudan.

The PAC decision redrew the region’s borders, decreasing its size, a decision that will determine who can vote in the planned referendum. As it stands, Abyei is predominantly Dinka Ngok, making it likely the vote would see the region move to southern control. The new borders also gave control of the richest oilfields in Abyei, including Heglig, to the north. Heglig, which pumped at a peak of about 150,000 b/d in 2006 before going into decline, now lies in South Kordofan state, with only the 4,000 b/d Diffra field within Abyei’s redrawn boundary.

While both the SPLM and the government in Khartoum said they would accept the PAC ruling, on 21 May the Sudan Army seized control of the region after three days of clashes with troops loyal to the south. While the death toll is unknown, the UN said that in the period to 20 June at least 100,000 people had fled Abyei. The region’s referendum has been put on hold indefinitely.

The north has adhered, so far, to a ceasefire deal that put UN peacekeepers on the ground in Abyei. These troops, mostly Ethiopian, will enforce a demilitarised zone in the troubled region. The north has since withdrawn its 5,000-strong force to the zone’s perimeter. But Sudanese troops are still active in other contested areas along the border.

Refugees arriving in South Sudan from South Kordofan state, which is under Sudanese control, claim the Sudan army has been carrying out a campaign of ethnic cleansing against African tribes since clashes erupted with opposition fighters and SPLA troops, loyal to Juba, on 5 June. At least 73,000 have fled to South Sudan, according to UN figures. Credible reports also indicate the north has been funding and arming at least three rebel militia groups, and perhaps as many as seven, still active in South Sudan’s border states.

LEAVING aside its military strategy, Bashir’s regime is under intense economic pressure to strike a favourable deal on oil revenues. Southern secession saw Sudan – which, according to the World Bank, is saddled with about $38 billion in foreign debt – lose about 75% of its pre-secession oil production of 500,000 b/d. The gap left in Khartoum’s oil-dependent budget, already straining to support its fights against insurgencies in the north and east, is immense.

The sums it will lose are just as hefty and are already imposing a new economic strategy. The Sudan finance ministry put CPA-agreed oil earnings for April and May this year at $569.96 million, a sizeable sum to lose from its treasury. The IMF estimates that the north stands to lose about $5.2 billion in oil revenue in the four and a half years to 2015. On 11 July, Sudan scrambled to plug this hole, announcing swingeing cuts in government spending as part of an austerity budget.

It may be too little, too late. Analysts said the north funnelled most of the oil revenue received since the CPA came into effect to its military, saving little to none. Some believe the country’s oil-cash shock may fatally destabilise Bashir’s regime, adding that South Sudan’s independence could be the catalyst for an Arab Spring-style revolution in the north.

For now, Sudan must secure the best deal it can. Sources indicated that it is adamant that revenue sharing – and revenue sharing alone – is its preferred solution. In the lead-up to independence, Bashir even threatened to halt flows along the Port Sudan pipeline: a blatant, desperate ploy to force the south to accept his terms. Sudan has also demanded compensation – some sources say the figure demanded is as much as $9 billion – for the loss of southern Sudanese oil revenue. South Sudan, understandably, has rejected the idea out of hand.

A high-level source close to the South Sudan government told Petroleum Economist: “For South Sudan, this is an existential question. It is about the country’s survival. Almost all South Sudan’s revenues – 98% – come from oil.”

And while the South Sudanese government has been a model of patience in discussions, its leading officials – most drawn from the SPLM and SPLA – are fighting men. Their patience may eventually wear thin. “The South Sudanese are conducting negotiations in good faith and want to reach an agreement with Khartoum,” said the source. “It is because of this they are continuing to talk, even in the face of great provocation. Yes, they are tired of war. They want to avoid war. Every person in this country knows what war means.

“But, make no mistake,” the source added. “[South Sudan’s government is made up of] hardened, seasoned bush fighters. If it comes to it – if it is necessary – they will go to war. And it will be total war. They will swamp the Sudd [the world’s largest wetland area in the Nile basin] with oil. They will let the oilfields burn. They will destroy pipelines. They will take the battle to Khartoum.”

Other sources were less apocalyptic, but all agreed that war – albeit as a last resort – could not be ruled out. Many expressed hopes that Bashir would temper his demands. One high-level source said the South Sudanese were prepared to provide aid to Sudan, or even sell it oil at a discount for a pre-determined period if such concessions would ease the way to an agreement.

In the meantime, South Sudan must continue building its oil sector. Its director-general of petroleum, Arkangelo Okwang Oler, shrugged off Bashir’s threats to stop South Sudan exporting through its infrastructure. “It is in Khartoum’s interests to keep the crude flowing, just as it is in ours. Besides, it is a bigger problem for them than for us.”

Speaking to Petroleum Economist at the ministry of energy, in Juba’s upscale Ministries district, Okwang preferred to expand on his country’s plans. “We have declining production in blocks 1, 2 and 4. We need to reverse that,” he said. The ministry has been looking at enhanced oil-recovery techniques. Okwang said they could help boost recovery from 28% to 35% over the next three years.

He also said there are plans to build a 100,000 b/d refinery at Gemeza, about 115 km north of Juba, but declined to name participants. While the proposed plant’s output would mainly be sold for export, domestic demand for refined products is high, particularly for diesel. Although there is an electricity grid in Juba, Bor and other big towns, capacity is limited and power cuts are common. Most South Sudanese rely on diesel-run generators.

Okwang added that, in addition to a joint venture between state-run producer Nilepet and trader Glencore, which will market some of the country’s oil production, marketing deals had also been signed with Vitol and China’s state-run Sinopec and China Oil.

But for the refinery to become a reality, South Sudan must build pipelines – an alternative crude export route and perhaps even a refined products link. While the marketing deals struck by the South Sudanese government will cover crude sent to Port Sudan, the country is keen to find new markets and new ways to reach them. Okwang confirmed that a line – probably for refined products, although a crude link is also possible – to the Kenyan port of Lamu, part of a wider East African energy corridor, was being considered, as was a route to Mombasa, which has a refinery capable of handling Dar Blend.

Okwang added that an export route through Uganda was not out of the question. “There are many global companies interested in coming here. The Asian companies are already present. I expect they will stay,” he said, adding: “Tullow Oil has approached us.”

Dublin- and Aim-listed Tullow holds substantial reserves in Uganda’s Lake Albert play, which lies just a few hundred km south of its border with South Sudan. Should the Ugandan government get its wish for a refinery – or refineries – as part of the development plan for the Albertine Graben discoveries, linking South Sudan’s fields to any Ugandan pipeline would be a relatively simple and economic option, albeit at least four to five years away. Tullow declined to comment when contacted by Petroleum Economist.

But before deciding on an alternative export route, South Sudan must choose whether to keep contracts agreed before the 2005 CPA. Energy minister Garang Diing Akuong told reporters all deals agreed with the Khartoum-based government would be subject to scrutiny. “We will not terminate any contract if there are no concerns, but we must review them to see possibilities of working together with the companies under the new policy,” he said.

It is believed that South Sudan wants to review Total’s agreement for Block B, in Jonglei state’s Bor basin. The French producer has yet to start exploration on the block, which was subject to international arbitration after the SPLM awarded the licence to UK junior White Nile Petroleum in the early 2000s. Other agreements, including those struck with CNPC, ONGC Videsh and Petronas, which all operate in consortia with the state, will also be reviewed, but are unlikely to be altered.

Deng said that, after the war, South Sudan asked Total to resume work, but “they have not yet come in.” Block B covers all of Jonglei state, the country’s largest. Deng went on to say South Sudan was considering dividing the block into “two or three or four” and relicensing the small tracts. “There is no reason why we can allow one company to monopolise our resources,” he added.

A Total spokesman said the company “strongly wishes to resume work and remains more committed than ever” to doing business in South Sudan. But, he said, a number of conditions must be met before it would start work. “We need to see improvements in security. Our staff must be safe.” Total also needs to ensure the rights it secured under the 2004 production-sharing contract, signed with the Bashir regime, are preserved.

The major said it wants clarification about whether US sanctions imposed on Bashir’s regime apply to South Sudan and the extent of any exemption. It is understood the US has exempted South Sudan from sanctions in place against the north. The Office of Foreign Assets Control (OFAC), which oversees sanctions, said the measures would continue to apply only to Sudan, not South Sudan. The US imposed economic and trade sanctions in 1997, alleging Sudan was a state sponsor of terrorism. In 2006 and 2007, sanctions were strengthened over the Darfur conflict.

But the OFAC said certain aspects of the sanctions may still apply to the south if it involves properties or interests related to the government of Sudan. “For example, the Sudan Sanctions Regulations will prohibit a US company, unless authorised by OFAC, providing services to the petroleum industry in the new state if those services would benefit the government of Sudan, or relate to the petroleum industry in Sudan, or from transporting exports of petroleum or petrochemical products through Sudan,” a spokesman said.

“Further, should a revenue-sharing arrangement between Sudan and the new state result in the government of the new state making payments to the government of Sudan from the sale of Southern Sudanese petroleum, US persons generally could not engage in transactions involving the oil industry in the new state unless authorised by OFAC”.

South Sudan, still in its infancy, faces hard choices and even harder decisions in the first few months of its life. How the SPLM-led government chooses to resolve the country’s oil question is critical to South Sudan’s future. For now, freedom in name from the regime in Khartoum is enough for many ordinary South Sudanese. But freedom alone will not feed the country’s children, educate them, or enable them to prosper. Used wisely, its oil wealth can.

A diplomatic source told Petroleum Economist he hoped the country’s leadership would be able to turn its back on its military and tribal roots, rising to meet the aspirations of South Sudan’s people. “My hope is that, in 30 years, South Sudan will be an example for Africa. Even, perhaps, for other developing nations,” he said. “South Sudan has that opportunity and my dearest hope is that they will use it well.”

THE FATE of as many as 2 million southern Sudanese living under Khartoum’s control was thrown into uncertainty when they were summarily stripped of their citizenship by Omar al-Bashir’s government Friday 8 July, the eve of South Sudan’s secession.

Late on 8 July, Bashir, who has been indicted for crimes against humanity, war crimes and genocide by the International Criminal Court for his role in the Darfur conflict, said all southern Sudanese resident in the north were no longer Sudanese citizens, a move that, at a stroke, rendered up to 2 million people stateless. The following morning, he travelled to Juba to witness the Republic of South Sudan’s official declaration of independence. Under heavy guard, Bashir did not address the crowd.

ALTHOUGH there are no exact figures for the number of southern Sudanese residing in the north, aid-agency sources estimated the move affected “hundreds of thousands at the least”, many of whom have no ties – other than ethnicity – to the south. UN figures put the number of ethnic southerners living in Sudan at around 1 million, although South Sudan’s statistics bureau estimates claim double that reside in the north. It is understood that the UN’s refugee agency, the UNHCR, expects a minimum of 400,000 southern Sudanese to return from the north this year.

Khartoum-based human-rights lawyer Amin Maki Madani told local media the move was “an immoral act resembling Nazism”, adding the decision violated Sudan’s nationality laws.

The move follows a mid-June decision by the Khartoum government to dismiss all southern Sudanese employed in Sudan’s civil service and government institutions, including state-run oil company Sudapet. Credible reports are emerging that the government has also requested private-sector employers to provide it with lists of southern Sudanese staff. A well-placed source told Petroleum Economist that many southern Sudanese working in the private sector have been fired.

Sudan’s oil minister, Lual Deng, is one high-profile southerner dismissed from office in the wake of independence. Omer Mohamed Kheir, the oil ministry’s secretary-general, told news agency Bloomberg: “The same thing is happening in all government ministries.”

Ali Ahmed Osman will step in until Deng’s successor is named. But it is understood other southern officials within the oil ministry will remain in their posts until the future operation of Sudan’s oil sector is decided. A spokesman declined to name the officials, how long they would remain employed by the ministry, or how long they would be allowed to remain in Sudan.

Meanwhile, an aid-agency source said: “Was this expected? No. But we have been working with a number of possible emergency situations and this was on our list. No one knows how this will work out. Everything is being monitored, but it is extremely difficult to know what will happen. We do know that the men are waiting in Khartoum. They expect to be paid out from their jobs.”

AT THE UNHCR way-station in Juba, Agnes Solomon, Amelia Proveto and Charity Valentino, all from the Torit region of South Sudan and recently returned from Khartoum, told Petroleum Economist that their husbands remained in the north. Proveto said her husband, a labourer, had been sacked without pay several weeks ago. “He has been forced into the [north Sudanese] army,” she told an interpreter in Arabic. “He has been told if he serves nine months in the army, he will be paid and free to leave.”

One woman voiced fears that by joining the Sudan army, southern Sudanese may be forced to take part in attacks along the contested Sudan-South Sudan border.

A UNHCR source confirmed the organisation is preparing for a wave of returnees from the north. Most will travel down the River Nile, a journey that can take two to four weeks by barge. The road linking Khartoum to Juba has been closed at the contested border since the resumption of hostilities in Abyei in May this year. Since then, violence has also erupted in the border states of South Kordofan, Upper Nile and Warrup, effectively sealing the land border. Since the end of October, an estimated 306,000 south Sudanese have returned from Khartoum.

Republic of South Sudan: key facts

Capital: Juba. GDP: $90 per person.

Territory: before independence Sudan was Africa’s largest country, covering 2.5 million square km. South Sudan’s territory covers an estimated 640,000 square km, it has just 60 km of paved road.

Life expectancy: 42 years.

Mortality rate: infant – 102/’000 live births. One child in every seven dies before their fifth birthday; maternal – 2,054/’000 live births.

Population: disputed. At the time of the 2008 census, South Sudan’s population was 8.26 million. But earlier this year the South Sudan government claimed up to 12 million people live within its borders; growth rate 2.8%; 90% live below the poverty line.

Ethnicity and religion: the country has about 200 ethnic groups. The largest, the Dinka, accounts for an estimated 25% of the population. Other large groups include the Nuer, and Shilluk, with a sizeable ethnic Arab minority in the northern states. Traditional indigenous religious beliefs prevail, Muslim and Christian minorities.

Language: the official working language of the new government is English, although this is mostly spoken by the educated elite. Arabic is widely spoken, a legacy of forced Arabisation policies. A wide variety of indigenous languages are also spoken.

Indicators: Less than 50% of children receive five years of primary-school education; 1.3 million enrolled, but only 1.9% complete primary education; a 15-year-old South Sudanese girl has a higher chance of dying in childbirth than of completing basic schooling. Around 85% of the country’s adult population is illiterate. Only 27% of the population have access to clean water, just 15% to sanitation.

Sources: Unesco; World Health Organisation; Southern Sudan Centre for Census, Statistics and Evaluation; World Bank; IMF; UN

Who’s who

John Garang de Mabior (23 June 1945 – 30 July 2005): a member of the Dinka ethnic group, was a Sudanese politician and rebel leader. Trained as an economist and was awarded a PhD in agricultural economics from Iowa University. Founded and led Sudan People’s Liberation Army (SPLA) and its political wing, Sudan People’s Liberation Movement (SPLM), in 1983, at the outbreak of the second Sudanese civil war. The SPLM/A opposed Khartoum’s military rule and the forced Islamicisation programme imposed on Sudan’s non-Muslim citizens. Following the 2005 Comprehensive Peace Agreement, which he was instrumental in brokering, Garang briefly served as first vice-president of Sudan until his death in a July-2005 helicopter crash. Garang, who spoke of a “new, united Sudan”, believed the SPLM/A had a duty to fight for Sudanese oppressed by the northern regime, is lionised as the father of South Sudan, despite his trenchant opposition to secession.

Salva Kiir Mayardit (born 1951): the first president of the Republic of South Sudan. Kiir, like Garang, is also Dinka, but hails from a different clan. In the late 1960s, joined the Anya-Nya (Snake Venom) rebels, who fought the first Sudanese civil war (1955-1972) against Khartoum. Joined the fledgling SPLM in 1983, rising to head the military wing, the SPLA. At the time of the CPA, was second-in-command of the SPLM, taking over the leadership after Garang’s death. Is popular among the military, held unambiguous pro-secession views. In 2009, described the secession referendum as a choice between “being second class in your own country, or a free person in your independent state”.

Omar Hassan Ahmad al-Bashir (born 1 January 1944): president of Sudan and head of the National Congress Party. Came to power in 1989 in a bloodless military coup. In March 2009, was indicted by the International Criminal Court in The Hague on charges of war crimes and crimes against humanity for his role in the conflict in Darfur. The court later added a further indictment for genocide.

Time line: The Republic of South Sudan

1899-1955 – Sudan is under joint UK-Egyptian rule

1956 – Sudan gains independence

1958 – General Abboud leads military coup against the civilian government

1962 – Civil war begins in the south, led by the Anya-Nya (Snake Venom) movement

1964 – The October Revolution overthrows Abboud. Islamist-led government is established

1972 – Under the Addis Ababa peace agreement between the government and the Anya-Nya, the south gains self-governing status

1978 – Oil discovered in Bentiu, southern Sudan

1983 – Civil war breaks out between government forces and the Sudan People’s Liberation Movement (SPLM) and John Garang’s Sudan People Liberation Army (SPLA)

1983 – President Numeiri declares the introduction of Sharia law

1985 – After widespread popular unrest, Numeiri is deposed in a military coup

1986 – Coalition government formed with Sadiq al-Mahdi as prime minister

1988 – Coalition partner the Democratic Unionist Party drafts ceasefire agreement with the SPLM, but it is not implemented

1989 – National Salvation Revolution takes over in military coup, in which Omar al-Bashir takes part

1993 – Revolution Command Council dissolved after Bashir is appointed president.

1998 – US launches missile attack on a pharmaceutical plant in Khartoum, alleging it made materials for chemical weapons. Sanctions imposed on Sudan

1999 – Sudan begins oil exports from the Heglig and Unity fields

2001 – Khartoum accepts Libyan/Egyptian initiative to end civil war after failure of peace talks between Bashir and Garang in

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